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February 2013 posts

Martha’s Ethics

Jonathan B. Wight

Martha Stewart continues to skate along the thin edge of business ethics.

She served five months in prison for her 2004 conviction on conspiracy and obstruction. Already a billionaire at the time of the offense, Stewart engaged in insider-trading to avoid a paltry $45,673 loss on her ImClone Systems stock. Was that a deficiency in ethics or simply poor judgment?

Likely both. Stewart seems so driven to maximize her wealth and status that anything in the way has to go. And that includes good-faith contracts.

The latest case is her contract with Macy's Department Store. After getting out of prison, Martha rebuilt her media and merchandising company, Martha Stewart Living Omnimedia. Macy's bankrolled Martha's rebranding, devoting 40% of its marketing to push her merchandise for which it thought it had exclusive rights.

But Stewart wanted more…

So on the sly Stewart signed a deal with J.C. Penney—Macy's arch competitor. A loop-hole in the Macy's contract allows Stewart to sell her items directly to the public if it is done in her own stores. But what's in a name? The J.C. Penney deal establishes Martha Stewart "stores" within its own department store! Ha-ha! Fooled you Macy's! Took you for a ride! Aren't I clever! Knifing my business partner in the back is fun and profitable!

A court trial is now deciding whether this end-run is legal. Whether or not it is legal, it is unethical. Driving a Mack truck through a loophole may be what savvy business people and lawyers do, but it is not what someone of character and conscience would do in this circumstance.

Meanwhile, shares of Martha Stewart Living Omnimedia, Inc. are selling for $3, a catastrophic drop from their initial public offering close of $37 in 1999. There may be a reason the investing public does not trust Martha.

Rationality in Law and Legal Theory: An Ethics Symposium

Mark D. White

Below are details of a fascinating symposium which will be held at Georgetown Law in April:

Rationality in Law and Legal Theory: An Ethics Symposium

April 12-13, 2013

Both the law and legal theory make use of the notion of rationality.  Within legal theory both positivists and natural law theorists have put forward theses about rationality in order to support their accounts of the nature of legality. And the law itself is rife with appeals to rationality — for example, in tort law, to specify the general duty of care violation of which constitutes negligence, and in criminal law, to fill out various standard excuses (duress, mistake, provocation, etc.). The aim of this symposium is to bring together philosophers and legal theorists to examine these notions of rationality within their own disciplines and to consider the relationship between rationality as it is conceived within the law and as it has been conceived in legal theory.  Speakers include Marcia Baron (St. Andrews), Heidi Li Feldman (Georgetown), Claire Finkelstein (Penn), John Gardner (Oxford), Scott Hershovitz (Michigan), and Lewis Kornhauser (NYU).

Sponsored by the Department of Philosophy at Georgetown University and the Georgetown University Law Center

Registration for this event is complimentary, but is required. Please complete our online registration form.

The Spending Problem

Jonathan B. Wight

Some critics of government would like services and regulations to be cut to the minimum—keeping modest defense and justice, but allowing everything else to devolve to the market.

That's a wonderful utopian ideal. But we shouldn't let the best become the enemy of the good. That utopian ideal did not work in the time of Adam Smith, who favored reasonable regulations and expenditures for public goods like education. And it makes even less sense today.

Since that time, strong forces have pushed us toward more government. Here are two reasons, both relating to wealth:

  1. Population density. The world's population has doubled, and doubled, and doubled again. That growth has now slowed, but we have far higher population density and it will continue to increase in cities. People living on top of each other produce both positive and negative externalities. Since Pigou, economists have demonstrated how government intervention can deal with negative externalities through taxes, regulations, and so on.

    Ronald Coase is often credited with discovering that the market, left to its own self-interest, could solve the problem of negative externalities without government—assuming property rights and low transactions costs for defending those rights. But Coase explicitly rejected this notion, writing: "The world of zero transactions

Continue reading "The Spending Problem" »

Are Guns Safe?

Jonathan B. Wight

David Frum often delights by taking us to unexpected places. His thoughtful piece on handgun violence is worth reading: "Are Gun Accidents 'Very Rare'?"

According to data in the article, accidents with guns are not unusual, injuring about 19,000 people a year. Guns are also used intentionally in large numbers of suicides, not to mention homicides.

Is there a better way? Frum thinks so, but notes that data that could be helpful to answering the question has been systematically suppressed by the gun lobby.

Having lived through the decades of information suppression on cigarette smoking and health, one would hope for greater transparency here. Thank you, David.

Brothels and Deregulation

Jonathan B. Wight

Many economists think that opening markets could improve safety, security, and efficiency in areas such as prostitution, drugs, and human organs.

On the surface, the argument is quite simple: banning bad activities doesn't make them go away, it just takes them underground where the outcomes are worse. That is one of the strongest reasons for legalizing abortion.

But a recent Spectator piece argues that the Dutch experiment in legalizing prostitution has been "a disaster." ("Why even Amsterdam doesn't want legal brothels"). Rather than empowering women and emasculating pimps, legalization has empowered sex slave traders and drug dealers.

This suggests that bad power relationships (e.g., between men and women) were worsened by the lure of market profits. One reason may be the nature of the Dutch experiment—isolated to one small country rather than simultaneously legalized across Europe.

Or, one could note Michael Sandel's argument that markets in certain areas can corrupt fundamental values.

Another hesitation to deregulation comes from the movie Enron: The Smartest Guys in the Room (2005), which has been out for a long time but I just got around to seeing last night. It's an uneven movie, exciting and poignant, but in places not well-organized. The most heart-rending scene is when we meet a lineman for PGE electric in Oregon, a company acquired by Enron. This man had accumulated over $300,000 in his retirement account before Enron took over and converted his account to Enron stock.

Enron proceeded to rig the deregulated California electric market and create artificial shortages (the movie plays the tapes of traders conspiring to do so). Adam Smith would not be at all surprised that businesspeople take advantage of monopolizing opportunities.

Enron also created enormous accounting scandals by hiding debt in dummy shell corporations. When Enron's stock began to fall the PGE lineman was barred from selling, while at the same time Lay, Skilling, and other insiders cashed in hundreds of millions. The lineman walked away with $1,200 in retirement after 30 years.

Privatization and deregulation have certainly worked in some areas. There is still much economists need to learn about when and where this works in the public interest.

Cass Sunstein on paternalism in The New York Review of Books

Mark D. White

SunsteinIn the latest issue of The New York Review of Books, law professor and former OIRA chief Cass Sunstein reviews Bowdoin philosophy professor Sarah Conly's recent book Against Autonomy: Justifying Coercive Paternalism. I have not yet read Conly's book; while I am very interested in what Conly says, I am even more interested in what Sunstein, one of the chief advocates of libertarian paternalism, has to say about it.

Sunstein starts his review by citing Americans' widespead and deeply held disdain for paternalism, and then quotes the famous passage from John Stuart Mill's On Liberty in which Mill says that the coercive power of the state must be used only to prevent persons from harming each other and never to protect a person from himself or herself, based on the position that no one knows a person's interest better than that person. Then he summarizes the behavioral research (on the part of Daniel Kahneman, Amos Tversky, and others) that shows that people systematically and predictably make bad choices because of cognitive biases and defects in their decision-making processes. This much will be familiar to those who have read his academic work with Richard Thaler or their popular book Nudge, and in fact Sunstein finishes his introduction with a brief description of nudges, subtle changes in the choice environment (or choice arhcitecture) designed to steer people toward making better choice by taking advantages of the flaws in their decision-making. (This is the concept with which I take issue in my book The Manipulation of Choice: Ethics and Libertarian Paternalism.)

ConlyThen Sunstein turns to Conly's book, Against Autonomy. According to his review (which I will assume is accurate), Conly argues that coercive paternalism is justified by cost-benefit analysis—specifically, when the harms prevented are greater than the costs involved, including the possibly significant but finite amount of offense to persons whose autonomy is violated. Regarding people's self-knowledge, she makes a distinction between means and ends, arguing that people may be aware of their ends but are sometimes mistaken regarding the best means with which to pursue them. She believes, for instance, that everyone values his or her health, but nonetheless chooses unhealthy foods. Therefore paternalism, whether in the form of nudges, taxes, or bans, would promote people's final ends by helping them choose better means. Conly is much more willing than Sunstein and Thaler are to restrict freedom of choice—even while recognizing its very real value—if the benefits of the resulting behavior are large enough, arguing that the more important autonomy of ends is thereby promoted.

Sunstein admires Conly's ideas but has several criticisms, with which I agree (again, not having read the book). He suggests that autonomy may be considered an end in itself, making it different to trade off against means to achieving other ends. Alternatively, if autonomy is valued merely as means, that value may well be so great as to outweigh any benefits from paternalism. This is a common problem with any consequentialist system that admits its own costs as possible inputs to any decision: it risks defeating itself. (Louis Kaplow and Steven Shavell's book Fairness versus Welfare also suffers from this problem; I make this point in my criticism of the book here.)

Most interesting, Sunstein questions Conly's distinction between means and ends:

Conly favors a paternalism of means, but the line between means and ends can be fuzzy, and there is a risk that well-motivated efforts to promote people’s ends will end up mischaracterizing them. ... In some cases, moreover, means-focused paternalists may be badly mistaken about people’s goals. Those who delay dieting may not be failing to promote their ends; they might simply care more about good meals than about losing weight.

I agree completely, but I would maintain that this criticism applies just as strongly to Sunstein and Thaler's libertarian paternalism as it does to Conly's more blunt paternalism, as both presume people have certain ends and then judge their decisions to be ineffective in pursuit of them; the only difference between them in this regard is how far they're willing to go to influence behavior in the "right" direction.

ManipI respond to this element of paternalism—especially with regard to Sunstein and Thaler's libertarian paternalism—in The Manipulation of Choice. The idea is simple: people may make bad choices all the time, but no one knows that they're bad choices except the people making them. If I eat a donut, I may regard it as a bad idea because I'm watching my weight. Or, I may regard it as a good idea because I successfully used it as an incentive to finish a book chapter, or a chance to catch up with an old friend, or even an indulgence deliberately chosen in full awareness of its deleterious health effects because I like donuts. Since the paternalist has no knowledge of my ends, he or she cannot possibly judge my action to be an effective or ineffective means to reach them. Instead, the paternalist presumes common ends—such as health or wealth—on the part of a person (which I call value substitution) and then judges his or her decisions in light of those ends, resulting in paternalist interventions regarding diet and retirement planning (for example).

As Sunstein states, not all people are dieting or watching their weight, so we can't assume that unhealthy (but extremely tasteful) food choices are thwarting their ends at all. By that same logic, however, people have all kinds of financial plans too, so their "failure" to sign up for 401(k) programs cannot be assumed to be a bad decision (as Sunstein and Thaler claim in much of their work). However, the nudge of automatic enrollment would affect everybody equally, regardless of their reason for not enrolling, because it plays on the congitive biases and dysfunction that we all share. People are either too lazy to change the default choice or they're not, regardless of their preference; nudges don't discriminate between motivations, since they affect flaws in our decision-making of which we're not aware.

In his final paragraph, Sunstein recalls his introduction and agrees with Conly that behavioral research calls Mill's anti-paternalism into question. The pioneering work of Kahneman, Tversky, and their colleagues may make us question the decisions we make to achieve our ends, but it does not imply that there's anything opaque or unknown about our ends themselves. To be fair, there is psychological research that suggests this, such as the work described in Timothy Wilson's Strangers to Ourselves. But even if we do not know ourselves and our interests as well as we like to believe, we still know them a lot better than regulators and legislators do—and as long as this is true, it is impossible for paternalists to judge people's decisions or presume to improve them, whether with nudges or more direct measures.

David Brooks and Downton Abbey on Big Data

Mark D. White

Ever since Nate Silver pulled a Babe Ruth 527 times on election night, the virtues of "big data" have been hailed widely in the press. But David Brooks strikes a cautionary note in today's New York Times, correctly noting that data by itself cannot solve problems and making the point that qualitative judgment is necessary throughout the processes of data collection, interpretation, and implementation.

Matthew-crawley-and-tom-branson-galleryThough data wasn't "big" in the 1920s, we saw these points illustrated in the third season of Downton Abbey. Matthew Crawley, heir to the Downton estate, urges Lord Grantham to modernize the way the land is farmed, but Grantham is concerned more with the well-being of the tenant farmers and others who live off the estate. Crawley certainly has the data and the analysis to back up his claims that modernization is necessary to save the estate from bankruptcy, but Grantham makes him see the human side of the equation as well. It takes Tom Branson, the Irish revolutionary and former chaffeur who scandalously married Grantham's younger daughter, to broker an agreement between the two that promises to make the estate solvent while ensuring the welfare of the tenants.

Neither Brooks nor Branson would deny that quantitative analysis is a fantastic tool for clarifying some aspects of a problem, but they stress that we can't let its apparent precision and illusory objectiveness blind us to more qualitative concerns. As economists, we must be mindful of what our data captures and—more importantly—what it leaves out, and make sure to supplement our decision-making with these neglected (often nonquantifiable) factors. Material and financial costs and benefits matter, of course, but so do concepts such as dignity, rights, justice, and fairness, which are no more easily captured in a 21st-century spreadsheet than in a 1920s financial statement.

(For more on this point, see my chapter "Value in Economics: Accentuate the Qualitative, but Don’t Eliminate the Quantitative" in Values: Sources and Readings on a Key Concept of the Globalized World, edited by Ivo DeGennaro, Brill, 2012, pp. 331-347.)

The Minimum Wage Debate

Jonathan B. Wight

Krugman's column today endorses Obama's State of the Union proposal to raise the minimum wage from $7.25 to $9.00.

Do the math: That's a whopping increase of nearly 25! Seems strange Krugman would argue this is just a marginal change, with potentially minor labor effects.

Opponents of the wage hike point to the cascade effect this would have on everyone else's wages. Seniority and other factors would likely mean increases in wages above the minimum. While a business might afford to raise the wages of a small share of workers by 25%, it likely would struggle to do so across the board. Wage compression might then cause labor friction that could reduce the productivity spike Krugman relies on.

Proponents of the wage hike have some natural experiments to point to in which minimum wages rose with no increase in unemployment. It may well be the case that demand for unskilled labor is inelastic (unresponsive to price) in the short run. This means stores need to hire workers to clean up, and will pay the higher wage and continue to hire as many workers in the measured time frame. In the long run businesses will try to substitute capital for labor (better cleaning machines). So unemployment may rise, but only after the time it takes to develop and implement substitutes, which could take a decade or more.

The issue of the minimum wage is ethically significant. President Obama clearly believes in a "living wage":

"Tonight, let's declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty…."

The idea of a "living wage" is wrapped in confusion. There is no such thing as a biologically-determined living wage. Do we mean the money needed to buy nutrients that would keep the body from disintegrating and dying? Or, is it the money required to live in a minimally acceptable level socially? Adam Smith thought it clearly related to the latter concept, arguing that a linen shirt was a necessity even to the poor—since going without it would make you appear disreputable.

Likewise, Adam Smith endorses a type of living wage for manual workers:

"Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole." [Here Smith is talking about productivity improvements that have increased the real wages of laborers.]

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged" (Wealth of Nations 152).

Being "tolerably well fed, clothed and lodged" might then require the intervention of the minimum wage (although Milton Friedman's negative income tax might be a preferable policy). As is well-known, the minimum wage was higher in real terms about a half-century ago than it is today, despite dramatically increased productivity and wealth growth over that period. If the minimum wage increase of 25% happens, it will be an interesting experiment. I would be thrilled for the working poor who manage to keep their jobs, but saddened by the teenagers and others who will likely go without a job at that wage.

Our Children’s Economics

Jonathan B. Wight

What is the future of economics? Barry Eichengreen posted his ideas in "Our Children's Economics" in The Economist.

According to one view, the economics of 2030 will have marginal improvements, adding a bit of behavioral economics here, a spice of institutional theory there, perhaps even a re-writing of Adam Smith's ethics and a reinterpretation of the invisible hand that is not based on greed.

Eichengreen argues that the marginalist view is likely wrong. We are heading for major rifts and breakthroughs, similarly to the Keynesian revolution of the 1930s. What these are he cannot say.

My own pet theory is that economics will merge with biology to make BIO-ECONOMICS. Both fields try to understand survival and procreation in particular habitats with innovation and adaptation to changing environments.

Eichengreen notes that the mechanism by which knowledge is transferred from generation to generation will radically change. The old model is of a great authority who writes a definitive textbook that lasts for a generation: think of Smith and Wealth of Nations in late 18th century, Ricardo and his Principles in the 19th century, Marshall's great fusion at the end of the 19th and early 20th century, and Samuelson's great synthesis of Keynesian economics in the 1950s and on.

In the future, Eichengreen argues that textbooks will no longer be written by big-name authors, but through a wiki-process, electronically built from the bottom up. The result will be different to be sure:

"The outcome will be messy. But the economics profession will also become more diverse and dynamic – and our children's economics will be healthier as a result."

[Thanks to Pam Thomas for this link.]